- Troubled CRE debt restructuring surged to $18B in 4Q24, up from $6B in 2Q23.
- High interest rates and maturing loans are upping risk for US banks, especially those with CRE exposure over 300% of their total equity capital.
- Regulators are pressuring banks to cut their CRE exposure, but many are still “extending and pretending,” restructuring loans while waiting for lower rates.
- Aggregate CRE exposure across the banking sector remained steady at 132% for the quarter.
Troubled debt restructuring in US CRE reached $18B in 4Q24, as high interest rates and maturing loans threaten the US banking sector’s stability, per GlobeSt.
CRE Overexposure
The US banking system is under rising pressure due to its growing exposure to the CRE market, which is becoming more difficult to navigate due to persistent high interest rates.
According to an analysis by Florida Atlantic University (FAU), troubled debt restructuring has ballooned, reaching a staggering $18B in 4Q24—3 times the $6B figure recorded in 2Q23.
The FAU report highlights that while over 50% of this restructuring involves non-owner-occupied, nonfarm, and non-residential mortgages, there are concerns about multifamily and commercial construction loans, which are showing signs of deterioration.
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Banks at Risk
The level of CRE exposure within banks is reaching dangerous thresholds. As of Q4, 59 of the 158 largest US banks have CRE exposure exceeding 300% of their total equity capital.
In total, nearly 1.8K banks hold CRE exposure over 300%, with almost 1K banks surpassing 400%. Worse still, 504 banks report CRE exposure over 500%, while 216 have exposure above 600%.
The most at-risk institutions include Flagstar Bank, Zion Bancorp., Valley National Bank, Synovus Bank, Umpqua Bank, and Old National Bank.
Despite growing risks, the banking sector’s CRE exposure remained steady at 132%, which could signal banks are struggling to manage the current CRE market.
Still Extending, Pretending
Regulatory pressure has been mounting on banks to cut CRE exposure, but taking action is easier said than done.
Rebel A. Cole, a professor of finance at FAU, explains that banks are facing a dilemma: reducing exposure could signal weakness, worsening the situation.
As a result, many banks are still resorting to the “extend and pretend” strategy, when they restructure maturing loans under their original terms, hoping interest rates will fall enough for refinancings.
While this approach may offer short-term relief, it only delays the inevitable reckoning and raises the long-term risks for both banks and the broader economy.
